Wednesday, October 3, 2012

Note on the Socialist Economic Calculation Debate

A crucial assumption of Ludwig von Mises in his argument against a command economy was the following:
“ … von Mises (as well as everybody else in those days) envisages socialism as operating under consumer sovereignty. He explicitly excludes ‘planners’ sovereignty’—the authoritarian determination of the output assortment and hence the scarcity relations between all goods and services on the basis of the ‘planners’’ (the political rulers’) own subjective preferences. The task of the socialist economy was to maximize social welfare on the basis of the individual citizens’ own preferences. It was this that he found socialist calculation incapable of doing.” (Keizer 1987: 115).
And yet it is obvious that former communist states like the Soviet Union did not operate their economies on the principle of “consumer sovereignty.”

These were command economies with production decisions by planners. And that is why so much of the socialist calculation debate seems mostly an academic exercise. If one assumes that the output of the command economy is planned by administrators by their own standards or designs, and not primarily to maximize “social welfare on the basis of the individual citizens’ own preferences,” then we have a different debate.

For example, the Soviets developed a space program that required planning and production on a large and complex scale, and its achievements were not insignificant:
“Over its sixty-year history, ... [sc. the Soviet space program] was responsible for a number of pioneering accomplishments in space flight, including the first intercontinental ballistic missile (1957), first satellite (Sputnik-1), first animal in space (the dog Laika on Sputnik 2), first human in space and Earth orbit (cosmonaut Yuri Gagarin on Vostok 1), first woman in space and Earth orbit (cosmonaut Valentina Tereshkova on Vostok 6), first spacewalk (cosmonaut Alexey Leonov on Voskhod 2), first Moon impact (Luna 2), first image of the far side of the moon (Luna 3) and unmanned lunar soft landing (Luna 9), first space rover, first space station, and first interplanetary probe.”
The Soviet Union also created an industrial economy that beat Nazi Germany (albeit with help from the West), and delivered real output growth in consumer goods.

The empirical record shows that the Soviet Union “worked” in the sense that it was able to increase real output for some decades, as decided by its planners, though it had very serious economic problems from the 1970s (for the recent literature, see Allen 2003; Gregory and Lazarev 2003; Gregory 2004; Davies 2004). And note that the latter assertions are not an endorsement of, or support for, the brutal Soviet system or command economies in general, but merely statements of fact.

Even if in the long term it was inefficient and economic problems became severe, the Soviet planning system did manage to “work” in the short to medium term, though the stupidity, cruelty and incompetence of its rulers like Stalin imposed unnecessary suffering so great as to be on a level with Nazi Germany.


Allen, Robert C. 2003. Farm to Factory: A Reinterpretation of the Soviet Industrial Revolution. Princeton University Press, Princeton, N.J. and Oxford.

Davies, R. W. 2004. Years of Hunger: Soviet Agriculture 1931-1933. Palgrave Macmillan, Basingstoke.

Gregory, Paul R. 2004. The Political Economy of Stalinism: Evidence from the Soviet Secret Archives. Cambridge University Press, Cambridge, U.K. and New York.

Gregory, P. R. and V. Lazarev. 2003. The Economics of Forced Labor: The Soviet Gulag. Hoover Institution Press, Stanford, CA.

Keizer, W. 1987. “Two Forgotten Articles by Ludwig von Mises on the Rationality of Socialist Economic Calculation,” Review of Austrian Economics 1.1: 109–122.


  1. Jan said:Excellent, Lord Keynes!Brilliant!
    The Neo-Austrian´s simplified antagonism against all sort of planning and their narrow view of the concept goes beyond all sanity,and reject wellknown facts,but as Ernest Mandel once wrote:

    "We have been using the term ‘planning’. But the concept itself needs to be more precisely defined. Planning is not equivalent to ‘perfect’
    allocation of resources, nor ‘scientific’ allocation, nor even ‘more humane’ allocation.

    It simply means ‘direct’ allocation, ex ante. As such, it is the opposite of market allocation, which is ex post.These are the two basic ways of allocating resources, and they are fundamentally
    different from each other—even if they can on occasion be combined in precarious and hybrid transitional forms, which will not be automatically self-reproducing.

    Essentially they have a different internal logic.They generate distinct laws of motion.
    They diffuse divergent motivations among producers and organizers of production,and find
    expression in discrepant social values.

    Both basic kinds of labour allocation have existed on the widest possible
    scale throughout history.Both are therefore quite ‘feasible’. Both have also been applied
    in the most variegated fashions, and with most diverse results.
    You can have ‘despotic’ planning and‘democratic’ planning (those who deny the latter have never looked at a pre-colonial Bantu village).
    You can have ‘rational’ planning and‘irrational’ planning.
    You can have planning based on routine, custom, tradition, magic, religion,
    ignorance,planning rules by rain-makers, shamans, fakirs and illiterates of all kinds.

    Worst of all, you can have planning directed by generals; for every army is based on an a priori allocation of resources.

    You can likewise have planning organized in a semi-rational way by technocrats
    or, at the highest level of scientific intelligence, 'by workers and disinterested specialists.
    But, whatever their forms, all of these involve direct a priori allocation of resources (including labour) through the deliberate
    choice of some social body.

    At the opposite pole is resource allocation
    through objective market laws that a posteriori counteract or correct previously fragmented decisions taken by private bodies, separately or autonomously from each other.

    Similarly, market economies in the sense of ex post allocations of
    resources have historically existed in the most variegated forms.In principle, there could be market economies with ‘perfect’ free competition: though in practice this has hardly ever been realized.
    There can be market economies skewed by the dominance of powerful monopolies
    able to control large sectors of activity and so to fix prices over long periods.
    Markets can coexist with drastic forms of autocracy and despotism—as they did under eighteenth-century absolutism, nineteenthcentury tsarism, not to speak of various sorts of military junta or fascist
    dictatorship in the twentieth century.

    But they can also be combined with advanced forms of parliamentary democracy, as they have been in the latter half of this century—if in less than twenty countries out of the one hundred and fifty or so that comprise the capitalist world.
    Market economies may worsen the misery of broad masses, by an absolute lowering of their standard of living, as they did in most
    countries of the West for much of the eighteenth and nineteenth centuries,in Eastern Europe extending far into the twentieth century,
    and as they still do for at least half—if not more—of the inhabitants of the Southern hemisphere"
    Ernest Mandel- In Defence of Socialist Planning
    New Left Review I/159, September-October 1986

  2. You are much better than me at expressing ideas, LK :D

  3. Great post. There is also an interesting literature on planning that is different from the Eastern Bloc orthodoxy. Michal Kalecki, for example, devised a form of planning that was more concerned with meeting consumer demand than with the extreme emphasis on heavy industry and capital goods production that characterized most Eastern Bloc plans.

    Kalecki also wanted to give a greater role to worker's councils and decrease the power of the bureaucracy over individual firms.

    For his efforts, Kalecki was essentially exiled by the Polish communist leadership to an academic post where he had little influence on actual policy.

    1. And that was *after* he'd been exiled from policy posts in the west, for being a bit too pink.

      Kalecki got a raw deal all around.

  4. The Soviet Union could always look to the vast worldwide markets to obtain clues about proper pricing. A worldwide socialist regime would be running completely blind.

    1. Observing the prices of commodities in some other countries did not tell them the relative scarcity or abundance of relevant commodities in their own state.

      Their planning of prices needed information on relative scarcity/abundance in the Soviet Union, not overseas.

    2. Roddis' reply is what Mises says in Human Action. Aside from the theoretical problem LK identifies, there's also an empirical problem: where is the evidence that they ever did this?


  6. The Soviet Union had consumer sovereignty to thee extent that the planners sold consumer goods to the population and (when they didn't resort to rationing) had to set prices to clear the market.

    Planner could use these market clearing prices to gain some information about what goods to produce. Mises argument of course was that this information was not enough. Without competitively priced capital goods an efficient use of resources was impossible. And with state ownership of the means of production such pricing would not occur.

    Despite LK's partial defense of central planning anyone who ever visited an "eastern block" country before and after the fall of communism would have seen the stark difference in the economic efficiencies of the 2 systems.

  7. Note that that was a concession by part of Mises. As in, the "even if..." type of concessions.

  8. Rob Rawlings, I believe we should be careful when we say, "anyone who ever visited an "eastern block" country before and after the fall of communism would have seen the stark difference".

    Why so?

    After the fall of communism, several fringe economies - Kazakhstan, Estonia,.etc - saw GDP falling by 25-50%.

    25 to 50 percent!!!

    If it is fair game to say:

    "Communism is bad, because Poland had better living standards after communism."

    then it is also fair game to say:

    "Communism is good, because Kazakhstan had worse living standards after communism."

    That's because different regions saw a different impact of communism on their economies. Poorer, less industrious regions of the Soviet Union were devastated by the end of communism. Richer, more industrious regions soared in prosperity.

    1. Prateek,

      That is a fair point that would indeed be worth more study.

    2. How much of GDP before the fall consisted of capital goods that would never be of any use to anybody?

  9. Lord Keynes,

    This might interest you:

    1. Philip.I think you like this one "Murray Rothbards own words .The connection between Racism and anti statists"