Section 3: The Socialist Calculation Debate and the Soviet Experiment with Socialism

SECTION 3: The Socialist Calculation Debate, the Soviet Experiment with Socialism, and Transitional Political Economy in Post-Soviet Russia Highlights of the Socialist Calculation Debate ● Formal Timeline: 1920-1945 ● “Rounds of the Debate”: ○ Marxists economists vs. Austrian economists ○ Market socialist economists vs. Austrian economists ■ The notion that value is determined on the margin or subjectively determined by the value by consumers ● Marxists regarded the source of value being determined by the labor being put into a product ● Key Articles and Books: ○ Ludwig von Mises (1920) “Economic Calculation in the Socialist Commonwealth” ○ Oskar Lange (1936) “The Economic Theory of Socialism” Key Points of the Socialist Calculation Debate ● The socialist calculation debate, the debate over the possibility of economic calculation under socialism, is best understand as a methodological battle over economic theory itself, not as an ideological battle ○ The debate centered around different meanings (and misunderstandings) of the word “competition” ○ The debate included advocates of free markets, who agreed with socialist economists that economic calculation under socialism was theoretically possible (e.g. Frank Knight and Joseph Schumpeter) ● All of the contributions to the debate were meant to answer or defend the og. article Marx’s Economic Critique of Capitalism and Economic Theory of Socialism ● Marx’s concept of socialist central planning has an importance that transcends its role in the calculation debate ● In its broad outlines, Marx’s idea of bringing social production under “conscious control,” rather than leaving it to the whims of the “anarchic” forces of capitalism, is still the primary economic reason of socialism ● Marx was a systemic and radical theorist ○ Marx understand well the institutional underpinnings that fundamentally distinguished capitalism from socialism ● Within Marx’s explicit critique of capitalism, there was also an implicit theory of socialism ○ For Marx, studying capitalism and developing a positive theory of socialism are how aspects of the same endeavor ○ ● ● ● ● ● ● ● Marx said little directly about the nature of socialism, but in Das Kapital he described its fundamental attributes by clarifying its antithesis - capitalism If we understand what socialism is, we understand what capitalism is not Marx’s criticism of capitalism is not that it is based on human action, but that it is not of human design Marx would like to eliminate the wastes and exploitation of capitalism through perfect plan coordination under a single, deliberate, and unified plan Marx expected socialism to emerge from the progression of capitalism ○ Hence, it could not be achieved until the workers were numerous and united enough to take control of the means of production, or before the centralization of capital has proceeded far enough to make these means of production accessible to such centralized control In Marx’s vision of the production process, he distinguishes between production time and circulation time ○ Production time refers to actual time spend producing the commodity that the capitalist intends to make with the inputs purchased ○ Circulation time refers to the time spent transforming money into commodities and commodities into money It is precisely this aspect of the production process (circulation time) that is claimed to be unnecessary under Marxist socialism Resources expended in circulation time are wastes of the capitalist mode of production (or commodity production) and deductions of the capitalist’s surplus value, which is expropriated from workers What is Socialism? ● For Marx, socialism means first and foremost the abolition of private property in the means of production, and therefore an abolition of all market exchange in the means of production, for the purpose of delivering advanced material production ○ Production for direct use would replace production for exchange ● Socialism, by definition, therefore included an abolition of money prices, which are a result of the exchange of private property in the means of production Mises’s Critique of Economic Calculation under Socialism ● Mises’s argued that economic calculation under socialism is impossible ○ Positive critique of the coherence between means and ends of socialism ○ NOT a normative critique of socialism ● Mises’s critique was NOT a normative critique of the goals of socialism, ONLY the means by which to achieve it What is Economic Calculation? ● A competitive process of allocating scarce capital goods among competing consumer ends ● ● Mechanism for sorting among technologically feasible production projects those that are economically viable from those that are not Fundamentally, a competitive process that communicates contextual knowledge The Basis of Mises’s Critique of Socialism ● For the sake of argument, Mises granted central planners the following assumptions: ○ A free market in consumer goods ○ Perfect motivation (benevolence) ○ Complete access to current technological knowledge ○ Mises’s Syllogism 1. Without private property in the means of production, there will be no market for the means of production 2. Without a market for means of production, there will be no monetary prices established for the means of production 3. Without monetary prices, reflecting the relative scarcity of capital goods, economic decision-makers will be unable to rationally calculate the alternative use of capital goods The Nature and Implications of Mises’s Critique of Socialism ● Mises argued that the nature of the knowledge generated through market rivalry and embodied in money prices is contextual ● F.A. Hayek would render explicit the knowledge argument that had already been implicit in Mises’s critique against Marxist socialism ● Mises’s critique extends also to non-comprehensive planning Lange-Lerner Model of Market Socialism: The Response to Mises ● Central planning board would instruct the managers of state-owned enterprises to follow a set of profit maximizing rules consistent with perfect competition: ○ Price according to marginal cost ○ Produce at a level of output that minimizes AC ● By doing so, such managers would grope towards the conditions of equilibrium through trial and error, or what Leon Walras referred to as a series of tatonnements, a process which Langue and Lerner regarded as analogous to that which takes place under capitalism Hayek’s Response to Market Socialism ● According to Hayek, relative prices serve two roles in the market process: ○ An ex-ante role of guiding production in their capacity as relative prices ○ An ex-post role of assessing previous economic decisions in their capacity as inputs through profit and loss accounting ● Market prices are never equilibrium prices, and therefore not sufficient for economic calculator ● ● ● The information required to achieve profit-maximization and market equilibrium that are assumed to be given by market socialists, are by-products of the rivalrous market process Market socialism assumes away the very economic problem it claims to solve, namely how the information becomes generated and embodied in prices in the first place Outside the context of market competition through the exchange of private property over the means of production, this information does not exist, and therefore is not accessible to central planners Concluding Remarks ● Fundamentally, the socialist calculation debate was a controversy over the nature and role of competition in the market process ○ The Marxists condemned competition for wastefulness ○ The Austrians (Mises and Hayek) asserted its information necessity ○ The market socialists thought assumed it easy or failed to recognize the consequences of its introduction into their models without the institutional prerequisite of private property ● Whereas the Marxists and Austrians understood competition as a verb (a process of equilibrium), the Market Socialists understood competition as a noun (an equilibrium state of affairs) Policy Implications for Economies in Transition ● Until the collapse of communism in Eastern and Central Europe, Lange and Lerner were regarded as having “won” the debate ● In the aftermath of the collapse of central planning, what many mainstream economists had to “rediscover” were the institutional prerequisites that made a transition to a market process possible in the first place ● Policy recommendations such “privatization” or “price liberalization” without privet property under the rule of law puts the cart before the horse The Soviet Experiment with Socialism The Period of “War Communism” (1918-1921) ● Bolsheviks and Mensheviks ● The Political economy of Soviet Socialism ○ Our previous discussion on the problem of economic calculation was to establish theoretically how it would be impossible to rationally calculate under socialism The Debate over War Communism ● The chronology of economic events and economic polices that were pursued during the Russian civil war between are known today as “War Communism” (1918-1921) ● The debate over the period of “War Communism” is not a dispute over the facts of economic history, but a dispute over the interpretation of such facts, which included: ○ The abolition or private property ○ The elimination of currency and money prices ○ Forced collectivization of land and labor to centrally manage production Historical Background of the “War Communism” Period: 1918-1921 ● During the spring of 1917 leading up to the October Revolution in which power was seized from Czar Nicolas II of Russia, there existed four major political factions under a provisional government in Russia: ○ 1. Conservatives to the right of Constitutional Democrats ○ 2. The constitutional Democrats ○ 3. The Social Democrats and the Socialist Revolutionaries (including Mensheviks) ○ 4. The Bolsheviks Two Interpretations of the History of “War Communism” ● Interpretation #1: The policies implemented during the Russian Civil War between the Mensheviks and the Bolsheviks between 1919 and 1922 were a matter of military expediency ● If so, then Mises’s original critique regarding the impossibility of economic calculation under social is not historically applicable to “War Communism” Interpretation #1: War Communism as a Function of the Russian Civil War ● Maurice Dobb and E.H. Carr argued that this was necessary for the Bolsheviks to fight the civil war ○ Inflation was a forced tax on the moneyed bourgeois class, not on the proletariat in keeping with socialist principles ○ Once money became worthless, it became necessary to abolish private poverty by confiscating resources by force for the war effort Two Interpretations of the History of War Communism ● Interpretation #2: The period of “War Communism” represents an intended attempt to immediately implement a new social order in strict accordance with Marxist theory ● If so, it therefore demonstrates that Mises’s critique regarding the impossibility of economic calculation under socialism is correct Interpretation #2: “War Communism” was intended prior to the Russian Civil War ● According to Lenin and the Bolsheviks, World War I had ripened the conditions for a Marxist revolution given that war planning (emulating the German move to a command economy under the Hindenburg Program of 1916) had increasingly concentrated capital and brought production under increasingly conscious control ● ● World War I had intensified the exploitation of the proletariat Therefore, Lenin believed that the workers could and should take state power immediately and implement socialism according to Marxist doctrine The New Economic Policy (1921-1928), Introduction: ● After the failed attempt to construct a socialist order along Marxist lines during the period of “War Communism” (1918-1921) never thereafter did the Soviet Union attempt to implement socialism in its purest form ● In order to maintain power, Vladimir Lenin and the Bolsheviks were forced to retreat from their experiment with pure socialism ● This retreat was characterized by a series of economic policies that partially reintroduced market exchange and production, beginning in the spring of 1921, known as the “New Economic Policy” (NEP) Credible Commitment and Economic Reform ● Economic reform cannot achieve its desired objections without a credible commitment to institutional change, one that recommits political officials to rules, and therefore changes the payoff structure of both political agents as well as economic agents ● Distinction between de jure reforms and de facto reforms ○ De jure reform implies an official, or formal, change institutions or public policy ○ De facto reform implies an actual change in institutions or public policy, even though it may not be an official policy ○ De jure changes do not necessarily result in de facto changes, particular if there is no credible commitment to such change ● The argument for discretion is based on the premise that policies accepted for one period may prove to be inappropriate for another and, therefore, policymakers must have flexibility to adjust as circumstances change ○ The fundamental problem with the exercise of discretion in public policy is that, without binding commitment to the policy, unexpected changes in policy, which may appear optimal to a particular situation of time and place, can provoke unintended consequences that run counter to the objectives of policy ○ The problem is that economic actors who realize such unexpected changes will anticipate the policy change and act in a counterproductive manner from the perspective of the policy-maker ○ Focusing on the credibility and commitment problem allows us to highlight why recurring rounds of reform efforts that occurred in the Soviet Union failed to achieve its objectives The Economic Transition to NEP ● NEP represented a policy of economic liberalization that was intended to restore partial economic freedom to the peasants, appease political unrest, and spur agricultural production ○ ● ● Relative freedom of exchange and production produced a drastic recovery from the catastrophe of war communism, particularly through the entrepreneurial activity of middlemen, known as “Nepman” The fundamental basis of NEP was the substitution of the tax in kind for the grain requisitioning of “War Communism” May 1921: The Sovnarkom (Council of People’s Commissars) permitted not only the sale of surplus food by peasants in farmer markets as well as trade by others of goods produced by small scale private manufacturers Problems with Reform Efforts of NEP ● The fundamental problem with the NEP is that it did not dismantle the existing institutional infrastructure within which production took place ○ Through some private property exchange was allowed, sustained economic growth and recovery could not occur without the rule of law ○ Without a credible commitment that established binding constraints on the discretion of the Bolsheviks, NEP was not able to achieve its objectives ● The NEP that was implemented with incentive incompatibilities, failing both economically and politically ● Political Problems underling the goals of NEP ○ Ideological commitments of the Communist Party ○ At the same time that Lenin re-introduced market mechanisms, he outlawed all political factions within Soviet politics, including factions within the Communist Party ● Economic Problems undermining the goals of NEP ○ Price controls and laws against speculation created legal uncertainty for NEP ○ Without the rule of law, arbitrary requisitioning was perceived as a viable policy option The End of NEP ● What followed the end of NEP in 1928 were the increasingly authorization measures of Joseph Stalin, including collectivization of agriculture ● The failure of NEP was caused neither by market institutions nor due to the particular motivations of political officials (Lenin and later Stalin) ● NEP failed due to the internal contraindications of its policy, which would required increasing political control over the economy The Tragedy of the Failure of NEP ● The failure of the experiment with pure socialism, the subsequent failure of the NEP, and the rise of totalitarian rule under Stalin, cannot be explained by having malevolent individuals in charge of planning the economy ● As Mises argued above, the institutional conditions of socialism precluded central planners from achieving their objectives even under the best of intentions ● The rise of totalitarianism under Stalin is an unintended consequence of socialism, not a historical accident. How? F.A. Hayek “Why the Worst Get on Top” ● An application of Adam Smith’s notion that specialization under the division of labor is limited by the extent of the market, but applied to politics ○ Distinction: markets are based on voluntary exchange, whereas government refers to a monopoly of legitimatized force (Max Weber) ○ As the extent of central planning increases, the incentive structure within this political context, by logical implication, will select leaders with a comparative advantage to specialize in the use of force ○ The complexity of centrally planning an economic system implies that the planners must be granted almost unlimited discretion in order to respond to its unintended consequences ● Totalitarianism is neither a consequence of “corruption” nor “historical accident”, but rather a logical consequence of the institutional incentives of the attempt to transition to a centrally planned economy A Rent-Seeking Model of Soviet Economy: The Soviet Economic in Theory and Practice ● Questions: ○ Given the impossibility of economic calculation under a socialism, how can we explain the duration and existence of the Soviet Union? ○ If central planning did not operate under the guidelines of Marx or according to the model of market socialism, how did it actually operate? ○ Why were there pervasive shortages in the Soviet economy, as well as other centrally planned economics in Eastern and Central Europe. ● Soviet-style socialism in reality was best understood as a mercantilist economy Characteristics of Mercantilism ● The government is headed by an autocrat ● This autocratic state extensively intervenes in the economy and sponsors a large variety of monopolies and cartel arrangements ● Positions of monopoly status as well as various other restrictions on competitive entry are sold by the autocrat as a means of raising revenue; ● The autocrat employs a specialized bureaucracy whose is to monitor the various monopolist-franchisees to ensure that they do not behave “competitively” in relation to one another, and also to enforce barriers designed to deter outside entrants Why is the Mercantilist Model to Understand the Soviet Economy? ● First, given the Soviet economy’s inefficiency in terms of delivering economic prosperity to the masses of the population, it explains the political logic by which the Soviet system was able to last so long ○ ● This logic was to concentrate benefits on those in power and disperse the costs of inefficiency on the masses of impoverished Soviet citizens ○ As a result, the Soviet system incentivized the creation of a loyal bureaucracy, who benefited directly from maintaining the existing system Second, this model is uniquely well-suited to analyzing resource allocation in non-market settings, such as in politics ○ Mercantilism is a rent-seeking economy ○ Rent-seeking is simply the non-market manifestation of competition for income, derived from political control rights over resources ○ Rather than abolishing private property and rivalrous competition of the marketplace, in reality property rights and competition were simply transferred to the political marketplace of patronage, known as the nomenklatura system Digression: The Nomenklatura System ● The nomenklatura refers to a vast political cartel of interlocked state monopolies, which worked to provide and protect perquisites to those in appointed positions of power, namely by controlling entry and competition to these positions ○ ● ● In effect, the nomenklatura refers to a vast collusion among the separate stateowned firms and ministries so that the Soviet system operated as an effective political and economic monopoly ○ Illicit entry and competition by one monopolist into the privileged market domain of another state-sanctioned monopolist was controlled so as not to chisel the value of the latter’s monopoly privilege, which came in the form of bribes and perquisites received from de facto control of state resources Third, it also provides the rationale behind the persistence of a shortage economy and the bias in centrally planned prices throughout the history of the USSR Contrary to the model of market socialism, why were the Soviet central planners incentivized to hold down prices over scarce goods and services, and therefore perpetuate shortages, rather than set market-clearning prices? Summary ● De jure, centralization of the Soviet economy was centralized along the guidelines of Marxism, where private property in the means of production, market prices, and profit and losses were abolished. ● De facto, informal property rights continued to operate, both externally in the form of black markets, and internally through control over state-produced resources, which were monetized via exchange on the black market.