Friday, October 02, 2009

Enrico Barone, The Originator Of The Socialist Calculation Argument

Arguably, socialism, when implemented with a centrally planned economy, is guaranteed to not produce a fairly high standard of living. Market prices are needed. This argument was originated by Enrico Barone:
"25. But it is frankly inconceivable that the economic determination of the technical coefficients can be made a priori, in such a way as to satisfy the condition of the minimum cost of production which is an essential condition for obtaining that maximum to which we have referred. The economic variability of the technical coefficients is certainly neglected by the collectivists; but that it is one of the most important sides of the question Pareto has already very clearly shown in one of his many ingenious contributions to the science.

The determination of the coefficients economically most advantageous can only be done in an experimental way: and not on a small scale, as could be done in a laboratory, but with experiments on a very large scale, because often the advantage of the variation has its origin precisely in a new and greater dimension of the undertaking. Experiments may be successful in the sense that they may lead to a lower cost combination of factors; or they may be unsuccessful, in which case that particular organization may not be copied and repeated and others will be preferred, which experimentally have given a better result.

The Ministry of Production could not do without these experiments for the determination of the economically most advantageous technical if it would realize the condition of the minimum cost of production which is essential for the attainment of the maximum collective welfare.

It is on this account that the equations of the equilibrium with the maximum collective welfare are not soluble a priori, on paper.

26. Some collectivist writers, bewailing the continual destruction of firms (those with higher costs) by free competition, think that the creation of enterprises to be destroyed later can be avoided and hope that with organized production it is possible to avoid the dissipation and destruction of wealth which such experiments involve, and which they believe to be the peculiar property of 'anarchist' production. Thereby these writers simply show that they have no clear idea of what production really is, and that they are not even disposed to probe a little deeper into the problem which will concern the Ministry which will be established for the purpose in the Collectivist State.

We repeat, that if the Ministry will not remain bound by the traditional technical coefficients, which would produce a destruction of wealth in another sense - in the sense that the greater wealth which could have been realized will not be realized - it has no other means of determining a priori the technical coefficients most advantageous economically, and must of necessity resort to experiments on a large scale in order to decide afterwards which are the most appropriate organizations, which it is advantageous to maintain in existence and to enlarge to obtain the collective maximum more easily, and which, on the other hand, it is best to discard as failures.

27. Conclusions. From what we have seen and demonstrated hitherto, it is obvious how fantastic those doctrines are which imagine that the production in the collectivist regime would be ordered in a manner substantially different from that of 'anarchist' production.

If the Ministry of Production proposes to obtain the collective maximum - which it obviously must, whatever law of distribution may be adopted - all the economic categories of the old regime must reappear, though maybe with other names: prices, salaries, interest, rent, profit, saving, etc..." -- Enrico Barone, translated from "The Ministry of Production in the Collectivist State" Giornale delgi Economisti (1908)


Anonymous said...

"Market prices are needed."

Well, one thing is sure: decentralisation is needed. And the communication of appropriate information to make sensible decisions.

May I suggest section I.1 of An Anarchist FAQ which discusses the calculation argument from a libertarian (socialist) perspective.

Notes that socialism need not exclude the market and, according to von Mises' own arguments, Proudhon's mutualism would not suffer from his blanket rejection of socialism. It also discusses libertarian communism and why market prices can hide information needed for sensible decision making as well as increasing uncertainty and such like.

It also notes that anarchists like Kropotkin pointed to how centralised state socialism would be unable to utilise local knowledge a good five decades before von Hayek argued it.

An Anarchist FAQ

Robert Vienneau said...

I entirely agree that Mises' argument does not cover or counter anarchist ideas. I think some following in the tradition of Mises and Hayek have said so.

Emil Bakkum said...

As usual, the reality is more complex than the theory. The East-European economies based their central plans mainly on physical (material) flow schemes (balances, input-output tables). However these were always accompanied by price schemes, which were meant to steer the costs and profits of the enterprises. Value accounting was vital for an efficient production. In fact they were mixed economies without private property.

The comments of Barone are interesting but outdated. For thanks to Sraffa we know that in anarchist production it is virtually impossible to move towards the general competitive equilibrium. And personally I even have my doubts about Pareto's restriction to ordinal and individual utility. Utility may well be cardinal, and even collective. During WWII Oskar Lange advocated a decentralized planning, where the economy is steered by means of fixed prices. Evidently this can not work, since the firms don't know how to reach their maximal profit (prices continue to fluctuate). Nevertheless, mistakes die hard. For instance, the book about welfare economics of A.M. Feldman, published in 1980 (!), still repeats Langes suggestion!

In addition, the neoclassical idea of perfect substitution between production factors is not realistic. Usually only a few production methods are available. In the neoricardian model the enterprises chose the most efficient method (and the most efficient technique, on the system level). But then you will not be able to utilise all resources to their full capacity. The neoricardian model does not consider scarce resources. For a compete use of resources there must always be the application of several production methods at the same time. The plan economies were very good at the complete mobilization of production capacity. Of course this has the disadvantage of employing ineffective methods.

As I said, the plan economies used the price system in order to steer the production. But this method was not very vivid, and usually most of the prices were fixed during the planning period of 5 years. For planning requires a certain predictability. And the price stability allowed the firms to invest in more efficient production methods. Flexible prices were only used for extreme cases, like the strong rises of the energy prices on the world market.

Emil Bakkum said...

My remark about Lange is a bit confusing. The planning board should fix the prices, and see what net product results. Then it should adjust the prices in order to improve the net product. It proceeds through trial and error. However, this can not work, since the planning board can not know in which direction the prices should be adjusted.

Robert Vienneau said...

Thanks for the comment. I agree that Sraffa can be read as, among other issues, pointing to the possible instability of general equilibria. But other, more mainstream economists, have also investigated such possible instability.

But I haven't thought before how this impacts market socialism. Maybe your point is novel.

smilingdavesblog said...

Barone is not saying anything like what Mises was arguing.

Barone: Small scale experiments will not tell you about what will happen on a grand scale.

Plus, the very fact that you have to waste time and resources on experiments under socialism means it will not eliminate waste.

Mises: Does not discuss those two points Barone raised, but rather has a completely different argument.

[Hint: Don't be lazy, guys, and read all three parts].

Robert Vienneau said...

"Barone is not saying anything like what Mises was arguing." How silly.

For the sake of argument, assume the socialist planners are not self-inteterested and are trying to do their best for their nation. Also put aside principal agent problems.

The planners would like to direct factory managers to produce the quantities and adopt the technique consistent with the exchange ratios that fall out of a solution of the system equations provided by a theory of General Equilibrium. But the planners, for some specified reason, cannot find such a solution. Thus, a system of central planning is incapable of providing a prosperous economy. The planners cannot know what efficient processes are available in each industry, given how the data is constantly changing due to, for instance, technological innovation.

The planners, if they want to achieve prosperity, must allow the firm managers autonomy, as in capitalism, and re-introduce prices, including prices of means of production and interest rates that appear on markets for "capital".

Whether or not you agree with it or not, the above is an outline of both Barone's and Mises' argument. And Smiling Dave's link is vulnerable, just like a hostile reading of Mises, to a charge of ignorance of duality theory in Linear Programming.

smilingdavesblog said...

Neither Barone nor Mises wrote what you did.

But hey, maybe I'm mistaken. I'm willing to learn. Quote me chapter and verse. Wrote a line of your version, then quote for us where Barone said it, and where Mises said it. Then go on to the next line and do the same thing. Keep at it until you do the same to your last sentence, then stop.

In academic circles, what I'm doing here is known as calling your bluff.

I also claim duality theory in Linear Programming has nothing to do with Smiling Dave's link. But hey, maybe I'm wrong. Show us exactly where Smiling Dave's link shows ignorance of duality theory in Linear Programming.

In other words, I'm calling your bluff on that last remark of yours, too.