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Brief notes on the so-called calculation problem

One of the most persistent myths about socialism is surely that it is “disproven” by the so-called calculation argument, first advanced in its modern form or forms in the twenties. And it seems to us that very few of those who repeat this myth have seriously attended to the primary texts; this does not, however, surprise us, as these are something of an embarrassment. Not quite as much as the primary texts on the so-called “tragedy of the commons”, where the author had told themselves a story and then scared themselves into believing it, but not far off either. The texts in question are all available online, curiously free of any charge. The first is Mises’s “Economic Calculation in a Socialist Commonwealth”. Reading it is, despite its length, quite the slog, but the crux of the argument is deceptively hidden at the very start. Mises begins:

“Under socialism all the means of production are the property of the community. It is the community alone which can dispose of them and which determines their use in production”

At first glance this looks alright, but there is a nuance here that leads to problems down the line. First of all, in socialism property is abolished – there is no “socialist property”, “property of the community” and so on. Second, Mises restricts this “communal property” to the means of production, as if means of consumption could be private property, on which more later. Mises continues:

“What basis will be chosen for the distribution of consumption goods among the individual comrades is for us a consideration of more or less secondary importance.”

This is absurd. Socialism bases itself on one criterion – satisfying actual human need. To divorce distribution from production as even some socialists do might seem “Marxian”, but it’s also obviously incorrect. Second, Mises needs this odd assumption to make the contrived scenario set out in the rest of the section plausible:

“Let us assume the simple proposition that distribution will be determined upon the principle that the State treats all its members alike; it is not difficult to conceive of a number of peculiarities such as age, sex, health, occupation, etc., according to which what each receives will be graded. Each comrade receives a bundle of coupons, redeemable within a certain period against a definite quantity of certain specified goods. And so he can eat several times a day, find permanent lodgings, occasional amusements and a new suit every now and again. Whether such provision for these needs is ample or not, will depend on the productivity of social labor.”

In other words, and anticipating the next paragraphs, we give steaks to everyone and then we “discover” that some people do not want steaks.

“Moreover, it is not necessary that every man should consume the whole of his portion. He may let some of it perish without consuming it; he may give it away in presents; he many even in so far as the nature of the goods permit, hoard it for future use.”

Why would a socialist society permit its members to hoard goods they are not using? Mises assumes it would because he assumes consumption goods will be private property. But in socialism, production is for use, and if goods are hoarded they are not being used. A socialist society would no more produce goods to be hoarded than it would produce goods to be destroyed.

“He can, however, also exchange some of them. The beer tippler will gladly dispose of non-alcoholic drinks allotted to him, if he can get more beer in exchange, whilst the teetotaler will be ready to give up his portion of drink if he can get other goods for it. The art lover will be willing to dispose of his cinema tickets in order the more often to hear good music; the Philistine will be quite prepared to give up the tickets which admit him to art exhibitions in return for opportunities for pleasure he more readily understands.”

And there we have it. Since in this contrived scenario everyone has been left with goods they do not want, they exchange them. Mises could not admit earlier that distribution would proceed on the basis of human need because his argument requires a distribution that leaves a significant number of individuals both lacking certain kinds of goods and having surpluses of other kinds of goods, which will then be exchanged away. Now, in socialism the principle dictating distribution is that every human need that does not conflict with the continued existence and development of society is met. In our lifetimes, this caveat means that many goods will not be abundant, particularly since it is necessary (and only socialism can do this) to massively wind down production. However, these scarce goods will still be distributed on the basis of need, which means that even if one wants to exchange for some good they want more of, there is nothing to exchange it for as there are no surpluses above what is needed. Any surplus represents a failure of socialist distribution. Mises’s the argument continues:

”The relationships which result from this system of exchange between comrades cannot be disregarded by those responsible for the administration and distribution of products. They must take these relationships as their basis, when they seek to distribute goods per head in accordance with their exchange value. If, for instance 1 cigar becomes equal to 5 cigarettes, it will be impossible for the administration to fix the arbitrary value of 1 cigar = 3 cigarettes as a basis for the equal distribution of cigars and cigarettes respectively. If the tobacco coupons are not to be redeemed uniformly for each individual, partly against cigars, partly against cigarettes, and if some receive only cigars and others only cigarettes, either because that is their wish or because the coupon office cannot do anything else at the moment, the market conditions of exchange would then have to be observed. Otherwise everybody getting cigarettes would suffer as against those getting cigars. For the man who gets one cigar can exchange it for five cigarettes, and he is only marked down with three cigarettes.”

In other words: it is assumed that there will be exchange;. furthermore it is assumed that such exchange will be so regular and formal it will have a fixed rate of exchange that will be a matter of public policy; and finally and most importantly it is assumed the community (which has by this point become “the state” for Mises, incidentally) will act to help people making the exchange. The third assumption is really the most amusingly strange one – even if we grant all of Mises’s previous assumptions it isn’t clear why a socialist society would encourage this sort of anti-social behaviour. No, actually, it is clear: so that Mises can demolish a strawman.

And of course if you assume all that then it follows that, as Mises says earlier:

“The principle of exchange can thus operate freely in a socialist state within the narrow limits permitted. It need not always develop in the form of direct exchanges. The same grounds which have always existed for the building-up of indirect exchange will continue in a socialist state, to place advantages in the way of those who indulge in it. It follows that the socialist state will thus also afford room for the use of a universal medium of exchange—that is, of money. Its role will be fundamentally the same in a socialist as in a competitive society; in both it serves as the universal medium of exchange.”

And then it is “discovered” that a system of planned production does not mix well with a system of anarchic exchange driven by a universal equivalent. The rest of the argument is fairly tedious: the point is it fails at the start by assuming a “socialist” society that is not socialist but capitalist.

A common way for economists to “correct” Mises’s argument – in truth, even among the true believers in Austrian economics no one seems to take socialist cigarette exchange seriously – is to make it about opportunity costs. In arguments of this sort, money is argued to be necessary in order to quantify opportunity costs from using up various goods and similar. Formally, this is a much more cogent argument yet it, too, implicitly assumes we are talking about a capitalist society. The entire framework of opportunity costs makes sense for a firm that buys and sells on the market, which is at any one point faced with a definite budget which it needs to spend in an optimal way, the optimal way being the way which generates the highest profit for a given budget. But this is not the case for a socialist society. The socialist society itself controls the supply of both raw materials, producer goods and labour. It is usually objected that these are not infinite; but with the exception of a few scarce raw materials, this is not an issue since the quantities of the materials etc. demanded will be nowhere near their natural limits. Furthermore, and crucially, there is nothing remotely resembling profit in a socialist society. Any material surplus above what is necessary, plus some small buffer stock, represents not private or collective profit, but a failure of social planning.

Therefore, just as there are no costs in socialism in general, there are no opportunity costs. The socialist society plans production so as to satisfy aggregate social need, no more and no less.

An alternative formulation of the so-called “calculation problem” is due to Hayek, and is outlined in his “Present State of Debate”. The first “problem” Hayek identifies comes down to his personal incredulity – there are so many goods in an economy, how can one planning centre take them all into account. The next salvo is particularly unfortunate:

“But this leads to another problem of even greater importance. The usual theoretical abstractions used in the explanation of equilibrium in a competitive system include the assumption that a certain range of technical knowledge is ‘given’. This, of course, does not mean that all the best technical knowledge is concentrated anywhere in a single head, but that people with all kinds of knowledge will be available and that among those competing in a particular job, speaking broadly, those that make the most appropriate use of the technical knowledge will succeed. In a centrally planned society this selection of the most appropriate among the known technical methods will only be possible if all this knowledge can be used in the calculations of the central authority. This means in practice that this knowledge will have to be concentrated in the heads of one or at best a very few people who actually formulate the equations to be worked out. It is hardly necessary to emphasize that this is an absurd idea even in so far as that knowledge is concerned which can properly be said to ‘exist’ at any moment of time. But much of the knowledge that is actually utilized is by no means in existence” in this ready-made form. Most of it consists in a technique of thought which enables the individual engineer to find new solutions rapidly as soon as he is confronted with new constellations of circumstances. To assume the practicability of these mathematical solutions, we should have to assume that the concentration of knowledge at the central authority would also include a capacity to discover any improvement of detail of this sort.”

Not to put too fine a point on it, but the problem of using knowledge from disparate sources without having to contain it all in one skull was solved definitely in the Uruk period of Early Bronze Age Mesopotamia with the invention of writing.

And this is the crux of what has come to be known as the “knowledge argument” variant of the “calculation problem”: a combination of incredulity and the strange insistence, which Hayek repeats both in the article in question and later articles like “The Use of Knowledge in Society” that using knowledge from disparate sources means that it must all be contained in one mind. (One must then imagine Hayek nonplussed as to how a single mind can remember information from the personal identification in a nation of millions, or all of the information in the NIST Chemical Kinetics Database.)

It is in “The Use of Knowledge in Society” that Hayek advances the last of the arguments which are today generally bundled together as “the” “calculation problem”, and perhaps the most popular one, although here we would probably agree with the “Misean” who think it is the weakest:

“One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail. The comparative stability of the aggregates cannot, however, be accounted for—as the statisticians occasionally seem to be inclined to do—by the “law of large numbers” or the mutual compensation of random changes. The number of elements with which we have to deal is not large enough for such accidental forces to produce stability. The continuous flow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day in the light of circumstances not known the day before, by B stepping in at once when A fails to deliver. Even the large and highly mechanized plant keeps going largely because of an environment upon which it can draw for all sorts of unexpected needs; tiles for its roof, stationery for its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation of the plant require to be readily available in the market.

This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the ‘man on the spot.’”

If the reader is waiting for an explanation of why this sort of “dispersed knowledge” (sometimes also referred to as “private knowledge” which rather underlines the analogy to the nonsense written about “qualia” in recent philosophy) cannot be communicated to the planning authority, they will wait for a long time. It is simply assumed that this is the case – although by some miracle, Hayek himself knows about it.

We could go on – perhaps we will another time. But we take it these few remarks show how baseless claims made about the “calculation problem” are. We would also draw attention to the fact that many “socialist” economists did in fact take this “problem” very seriously – in fact some considered it lethal for their vision of “socialism”. But the only “socialism” this confused arguments can defeat is a confused “socialism” or – let us clearly state what it is, Stalinism, the confused mishmash of half-remembered Marxism and half-acknowledged Kautskyianism.

So perhaps we should congratulate Mr. Mises and colleagues – if only the thing had worked. Today, of course, Stalinists and adherents of the “Austrian school” (of economic witchcraft and wizardry) are harmoniously against the prospect of actual socialism – against the replacement of property, commodity production and exchange with scientifically planned production for need. A fitting end.

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