Problems With The Economic Calculation Problem

Hakim on the Economic Calculation Problem

Reactionaries often bring up the Economic Calculation Problem (ECP) as a fatal objection to socialism, considered as entailing central planning. Ludwig Von Mises put this forth in 1920 as an argument in principle that central planning is guaranteed to be highly inefficient. He postulates that the planning authority knows the prices of consumer goods and all technical possibilities, including the endowments of originary factors of production. But without prices of intermediate goods, the planning authority cannot make rational decisions about how to produce commodities. Like Enrico Barone, Von Mises insists the planning authority must re-introduce prices for intermediate goods and a market for 'capital'.

Friedrich Hayek changed the question. He argued that efficient central planning was impractical, not impossible in principle. For Hayek, prices bring about a coordination among entrepreneurs of their plans and expectations. Hayek raised the question on how the planning authority could gather the data they need for their equations. He emphasized dispersed tacit knowledge of time and space.

I emphasize that what the ECP is is disputable. Also, it is inapplicable to the ideas of anarcho-syndicalism, council communists, and so on. Anyways, this post poses some problems with using the ECP as an objection to socialist central planning.

Magnitude of costs of failures of coordination. Neither Von Mises nor Hayek attempt to estimate the costs of a failure of coordination. Since they say a capitalist economy will always be in a disequilibrium state, capitalism will also suffer costs of discoordination at any point of time. How much more are the costs in a centrally planned society, as opposed to a capitalist society? What is the empirical evidence that the ECP was a major problem for the U.S.S.R?

Externalities. For economists of the Austrian school, the extent of the coordination of plans and expectations of diverse agents is a criterion for welfare economics. This approach contrasts with the maintream marginalist criteria of Pareto and Hicks-Kaldor efficiency. The approach of the Austrian school does not seem to me to adequately account for externalities, such as global warming. To Von Mises' credit, he does bring up the destruction of the unpriced natural beauty of a waterfall in discussing its use for power generation.

How do prices bring about coordination? To me, when Hayek describes economic coordination, he is describing something like Hicks' model of temporary equibrium, as in Value and Capital, or the Arrow-Debreu model of intertemporal equilibria, as in Debreu's Theory of Value. Much research suggests such a coordinated state cannt be expected to be brought about by disequilibrium market processes. (Issues exist in how my favorite model can describe trends in capitalist economies, particularly in accounting for if joint production.)

Mises is mathematically mistaken. Suppose prices of commodities provided as components of final demand, technical possibilies, and endowments of originary factors of production are given to the Ministry of Planning. The level at which to operate each production process is found as the result of the solution to an optimization problem. One does not need prices of factors of production to solve the primal problem. Such prices emerge as the solution of the dual problem. Von Mises' mistakes and dogmatism may have been useful in that they encouraged others to explore one approach to price theory.

Mises and Hayek misunderstand capitalism. Anyways, most prices in a capitalist economy do not communicate knowledge like Hayek describes. They do not continuously fluctuate under the influence of supply and demand. Rather, prices of manufactured commodities are usually full cost prices or administrated prices, set by firms. Variations in the level of output, inventories, and queues of orders are of some importance.

Above, I have not said anything about improvements in computer networks or computer speed. I do not see how IBM'a North Pole computer (Modha's blog) would be helpful in linear programming. Hakim recomments Cottrell and Cockshott (1993) for those who want to know more about the ECP. I have not read The People's Republic of Walmart, which some recommend.

Toni Negri, Bob Solow, Tony Thirwall

I feel each of these three needs more than I am able to say. I find intriguing radicals attacking communist parties from the left, as Negri and others (Autonomia) did in Italy in the 1960s and 1970s. I draw on those who have all sorts of arguments with Solow. I find him witty. Thirwall I associate with Nicholas Kaldor and development economics.

• Antonio Negri (1933 - 2023). Repost of 2015 interview from Democracy Now. Libcom page of works related to Negri.
• Robert Solow (1924 - 2023): MIT obituary. Russell Sage Foundation obituary. 1987 Nobel announcement.
• Tony Thirwall (1941 - 2023). Repost of an obituary from John McCombie.

Misrepresentations Of Keynes' Work

I claim that what mainstream economists teach about what Keynes wrote is often false and nonsenical. Unfortunately, this is quite impressionistic in that I do not give examples of these misrepresentations. I am writing here only about the General Theory. I suppose some mainstream economists might respond that they do not teach about Keynes at all.

Some say Keynes work was about policy, not theory. Keynes specifically says otherwise in the first sentences of the preface to his major work:

"This book is chiefly addressed to my fellow economists. I hope that it will be intelligible to others. But its main purpose is to deal with difficult questions of theory, and only in the second place with the applications of this theory to practice. For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises."

Some say Keynes claimed that persistent unemployment was caused by sticky wages or prices. Franco Modigliani (1944) is the locus classicus for this view. But Keynes starts Chapter 19 by stating exactly the opposite:

"...the classical theory has been accustomed to rest the supposedly self-adjusting character of the economic system on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment.

It was not possible, however, to discuss this matter fully until our own theory had been developed. For the consequences of a change in money-wages are complicated. A reduction in money-wages is quite capable in certain circumstances of affording a stimulus to output, as the classical theory supposes. My difference from this theory is primarily a difference of analysis; so that it could not be set forth clearly until the reader was acquainted with my own method."

Keynes thinks institutions that make money wages sticky downward are stabilizing, not an explanation of persistent unemployment. He notes that workers and employers may have no means of negotiating over real wages, instead of money wages. And he argues that it is rational for workers to be concerned with relative wages.

Some say Keynes confined his theory to the short run. At least one model in the General Theory is set in Marshall's short run. Investment is ongoing, but the stock of capital equipment is taken as given. This short run equilibrium is suppose to point of attraction in a very short run dynamics. Keynes, however, introduces a notion of long run equilibrium in chapter 5:

"If we suppose a state of expectation to continue for a sufficient length of time for the effect on employment to have worked itself out so completely that there is, broadly speaking, no piece of employment going on which would not have taken place if the new state of expectation had always existed, the steady level of employment thus attained may be called the long-period employment corresponding to that state of expectation. It follows that, although expectation may change so frequently that the actual level of employment has never had time to reach the long-period employment corresponding to the existing state of expectation, nevertheless every state of expectation has its definite corresponding level of long-period employment."

Some say that Keynes' major policy position was to recommended counter-cyclical fical and monetary policy. It is surprisingly hard to find any such argument in the General Theory. I think, as far as policy goes, Keynes recommended institutional changes, especially in Chapter 24, the final chapter of the General Theory. Keynes wants a less unequal distribution of income. He thinks there is some justification for some inequality:

"For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist to-day. There are valuable human activities which require the motive of money-making and the environment of private wealth-ownership for their full fruition. Moreover, dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative. But it is not necessary for the stimulation of these activities and the satisfaction of these proclivities that the game should be played for such high stakes as at present."

Keynes looks forward to permanently low interest rates, "the euthanasia of the rentier", progressive taxes, and "communal saving through the agency of the State". These changes will lead to the disappearance of rentier aspect of capitalism, which is a transitional stage. The goal is to deprive "capital of its scarcity-value within one or two generations". Keynes thinks these changes are consistent with entrepreneurship:

"Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward."

Probably the most famous policy pronouncement in the General Theory is a phrase in the following:

"I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative."

It might be helpful to think of the General Theory as containing several models, not all worked out, in a broader setting. The IS-LM model is only one of these models. Keynes theory is set in historical time, with business cycles occurring. A major point is to abolish a seperation between a microeconomic analyis in terms of real values and a monetary theory of nominal values.

I suppose one motivation for this post is Matias Vernengo's recent response to James Crotty. It seems every decade or so some Post Keynesian writes a book putting forth something like the unoriginal claims in this blog post.

References

• A. Asimakopulos. 1991. Keynes's General Theory and Accumulation. Cambridge University Press.
• Victoria Chick. 1983. Macroeconomics after Keynes: A Reconsieration of the General Theory. MIT Press.
• James Crotty. 2019. Keynes Against Capitalism: His Economic Case for Liberal Socialism. Routledge.
• Paul Davidson. 2007. John Maynard Keynes. Palgrave Macmillan.
• Stephen A. Marglin. 2021. Raising Keynes: A Twenty-First-Century General Theory. Harvard University Press
• Hyman Minsky. 1975. John Maynard Keynes. McGraw-Hill.
• Robert Skidelsky. 1983 - 2001. John Maynard Keynes (Three volumes). Viking.

Aims And Tasks Of Democratic Socialism

Socialist and coomunist parties have formed various internationals over the course of centuries. I consider a declaration of the Socialist International, adopted at its First Congress held in Frankfort-on-Main on 30 June-3 July 1951 an authoritative statement of "The Aims and Tasks of Democratic Socialism". This declaration was re-affirmed in 1962. The declaration starts as follows:

1. From the nineteenth century onwards, capitalism has developed immense productive forces. It has done so at the cost of excluding the great majority of citizens from influence over production. It put the rights of ownership before the rights of man. It created a new class of wage-earners without property or social rights. It sharpened the struggle between the classes.

Although the world contains resources which could be made to provide a decent life for everyone, capitalism has been incapable of satisfying the elementary needs of the world’s population. It proved unable to function without devastating crises and mass unemployment. It produced social insecurity and glaring contrasts between rich and poor. It resorted to imperialist expansion and colonial exploitation, thus making conflicts between nations and races more bitter. In some countries powerful capitalist groups helped the barbarism of the past to raise its head again in the form of Fascism and Nazism.

2. Socialism was born in Europe as a movement of protest against the diseases inherent in capitalist society. Because the wage-earners suffered most from capitalism, Socialism first developed as a movement of the wage-earners. Since then more and more citizens — professional and clerical workers, farmers and fishermen, craftsmen and retailers, artists and scientists — are coming to understand that Socialism appeals to all men who believe that the exploitation of man by man must be abolished.

3. Socialism aims to liberate the peoples from dependence on a minority which owns or controls the means of production. It aims to put economic power in the hands of the people as a whole, and to create a community in which free men work together as equals.

4. Socialism has become a major force in world affairs. It has passed from propaganda into practice. In some countries the foundations of a Socialist society have already been laid. Here the evils of capitalism are disappearing and the community has developed new vigour. The principles of Socialism are proving their worth in action.

5. In many countries uncontrolled capitalism is giving place to an economy in which state intervention and collective ownership limit the scope of private capitalists. More people are coming to recognise the need for planning. Social security, free trade unionism and industrial democracy are winning ground. This development is largely a result of long years of struggle by Socialists and trade unionists. Wherever Socialism is strong, important steps have been taken towards the creation of a new social order.

6. In recent years the peoples in the underdeveloped areas of the world have been finding Socialism a valuable aid in the struggle for national freedom and higher standards of life. Here different forms of democratic Socialism are evolving under the pressure of different circumstances. The main enemies of Socialism in these areas are parasitical exploitation by indigenous financial oligarchies and colonial exploitation by foreign capitalists. The Socialists fight for political and economic democracy, they seek to raise the standard of living for the masses through land reform and industrialisation, the extension of public ownership and the development of producers' and consumers' cooperatives.

7. Meanwhile, as Socialism advances throughout the world, new forces have arisen to threaten the movement towards freedom and social justice. Since the Bolshevik Revolution in Russia, Communism has split the International Labour Movement and has set back the realisation of Socialism in many countries for decades.

8. Communism falsely claims a share in the Socialist tradition. In fact it has distorted that tradition beyond recognition. It has built up a rigid theology which is incompatible with the critical spirit of Marxism.

9. Where Socialists aim to achieve freedom and justice by removing the exploitation which divides men under capitalism, Communists seek to sharpen those class divisions only in order to establish the dictatorship of a single party.

10. International Communism is the instrument of a new imperialism. Wherever it has achieved power it has destroyed freedom or the chance of gaining freedom. It is based on a militarist bureaucracy and a terrorist police. By producing glaring contrasts of wealth and privilege it has created a new class society. Forced labour plays an important part in its economic organisation.

11. Socialism is an international movement which does not demand a rigid uniformity of approach. Whether Socialists build their faith on Marxist or other methods of analysing society, whether they are inspired by religious or humanitarian principles, they all strive for the same goal — a system of social justice, better living, freedom and world peace.

12. The progress of science and technical skill has given man increased power either to improve his lot or to destroy himself. For this reason production cannot be left to the play of economic liberalism but must be planned systematically for human needs. Such planning must respect the rights of the individual personality. Socialism stands for freedom and planning in both national and international affairs.

13. The achievement of Socialism is not inevitable. It demands a personal contribution from all its followers. Unlike the totalitarian way it does not impose on the people a passive role. On the contrary, it cannot succeed without thorough-going and active participation by the people. It is democracy in its highest form.

Further sections of the declaration discuss the goals of political democracy, economic democracy, social democracy and cultural progress, and international democracy. I find non-dogmatic the section on economic democracy:

1. Socialism seeks to replace capitalism by a system in which the public interest takes precedence over the interest of private profit. The immediate economic aims of Socialist policy are full employment, higher production, a rising standard of life, social security and a fair distribution of incomes and property.

2. In order to achieve these ends production must be planned in the interest of the people as a whole.

Such planning is incompatible with the concentration of economic power in the hands of a few. It requires effective democratic control of the economy.

Democratic Socialism therefore stands in sharp contradiction both to capitalist planning and to every form of totalitarian planning; these exclude public control of production and a fair distribution of its results.

3. Socialist planning can be achieved by various means. The structure of the country concerned must decide the extent of public ownership and the forms of planning to apply.

4. Public ownership can take the form of the nationalisation of existing private concerns, municipal or regional enterprise, consumers' or producers' cooperatives.

These various forms of public ownership should be regarded not as ends in themselves but as means of controlling basic industrie and services on which the economic life and welfare of the community depend, of rationalising inefficient industries or of preventing private monopolies and cartels from exploiting the public.

5. Socialist planning does not presuppose public ownership of all the means of production. It is compatible with the existence of private ownership in important fields, for instance in agriculture, handicraft, retail trade and small and middle-sized industries. The state must prevent private owners from abusing their powers. It can and should assist them to contribute towards increased production and well-being within the framework of a planned economy.

6. Trade unions and organisations of producers and consumers are necessary elements in a democratic society; they should never be allowed to degenerate into the tools of a central bureaucracy or into a rigid corporative system. Such economic organisations should participate in shaping general economic policy without usurping the constitutional prerogatives of parliament.

7. Socialist planning does not mean that all economic decisions are placed in the hands of the Government or central authorities. Economic power should be decentralised wherever this is compatible with the aims of planning.

8. All citizens should prevent the development of bureaucracy in public and private industry by taking part in the process of production through their organisations or by individual initiative. The workers must be associated democratically with the direction of their industry.

9. Democratic Socialism aims at extending individual freedom on the basis of economic and social security and an increasing prosperity.

A lot of work is still required to fulfill these aims. I do not know how compatible detailed proposals some have put forth are with these aims.

Labor And Land Are No Commodities

I read Karl Polanyi's The Great Transformation: The Political and Economic Origins of our Time years ago. I find its thesis on the first passage of the first chapter:

"Nineteenth-century civilization rested on four institutions. The first was the balance-of-power system which for a century prevented the occurrence of any long and devastating war between the Great Powers. The second was the international gold standard which symbolized a unique organization of world economy. The third was the self-regulating market which produced an unheard-of material welfare. The fourth was the liberal state. Classified in one way, two of these institutions were economic, two political. Classified in another way, two of them were national, two international. Between them they determined the characteristic outlines of the history of our civilization.

Of these institutions the gold standard proved crucial; its fall was the proximate cause of the catastrophe. By the time it failed, most of the other institutions had been sacrificed in a vain effort to save it.

But the fount and matrix of the system was the self-regulating market. It was this innovation which gave rise to a specific civilization. The gold standard was merely an attempt to extend the domestic market system to the international field; the balance-of-power system was a superstructure erected upon and, partly, worked through the gold standard; the liberal state was itself a creation of the self-regulating market. The key to the institutional system of the nineteenth century lay in the laws governing market economy.

Our thesis is that the idea of a self-adjusting market implied a stark Utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness. Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way It was this dilemma which forced the development of the market system into a definite groove and finally disrupted the social organization based upon it. " -- Karl Polanyi

By the way Charles Peters has died.

In many ways, this blog is my commonplace book.

Anti-Communist Literature

We live, dead to the land beneath us,
Ten steps away no one hears our speeches.

But where there’s so much as half a conversation
The Kremlin's mountaineer will get his mention.

His fingers are fat as grubs,
And the words, final as lead weights, fall from his mouth.

His cockroache whiskers leer
And his boot tops gleam.

Around him a rabble of ring-necked leaders -
Fawning half men for him to play with.

They whinny, purr or whine.
As he prates and points a finger.

One by one forging his laws, to be flung
Like horeseshoes at the head, the eye or the groin.

And every killing is a treat
For the broad-chested Ossete.

-- Oslip Mandelshtam

This is just a bibliography. I have posted bibliographies before. I want people that are sympathetic to socialism of some sort or another. As usual, I am limited to works in or translated to English. Some of these examples are not clearly anti-communist. These are a mixture of novels and non-fiction. Some of these I have not read. I am sure this selection can be expanded.

• Richard Crossman (ed.). 1949. The God that Failed
• Milovan Djilas. 1957. The New Class: An Analysis of the Communist System. London: Thames and Hudson.
• Stefan Heym. 2022. Radek: A Novel. Monthly Review Press.
• Arthur Koestler. 1941. Darkness at Noon. Macmillan
• Janos Kornai. 1992. The Socialist System: The Political Economy of Communism. Princeton University Press.
• Nadezhda Mandelshtam. 1999. Hope Against Hope: A Memoir. Random House.
• George Orwell. 1945. Animal Farm.
• Boris Pasternak. 1957. Doctor Zhivago. New York: Pantheon Books.
• Francis Spufford. 2012. Red Plenty. Graywolf Press.
• Eugene Zamiatin. 1924. We

Elsewhere

• Girardi, Mamunuru, Halliday, and Bowles investigate, does studying economics make you selfish? In contrast to earlier research, they conclude no.
• Angus Deaton, in his book Economics in America: An Immigrant Economist Explores the Land of Inequality apparently says, "A reader might be forgiven for thinking we are scoundrels concerned only with our own financial gain."
• Apparently, the Rochdale Principles were set out in 1844 in Rochdale, England, as principles for running cooperatives.
• Intentional communities are another example of a non-capitalist institution. I have stumbled upon a web site for the Foundation for Intentional Communities.
• 'Keynesian Spaceman', in comments, informs me I was once brought up in a dispute on a discord server associated with some Austrian economists.
• Some arguments about the CCC have emerged on subreddits over the years.
• Shattering 'Market Theory', an old post on Daily Kos, reporting a discussion on a private email list of one of my numeric examples. (I have mentioned this before.)